First Ever RICO Claim Against NPE Dismissed, But Other Claims Including RAND Commitments Remain Viable

Feb.22.2013

Operating companies continue to search for ways to repel ever increasing infringement litigation attacks by non-practicing entities (NPEs). Their newest salvo, the much-watched claim by several wireless local area network (WLAN) product manufacturers against an NPE under the Racketeer Influenced and Corrupt Organizations Act (RICO), however, was dismissed last week by an Illinois federal court. But the decision offers hope for the theory, and allowed other claims to stand.

On February 4, 2013, the U.S. District Court for the Northern District of Illinois dismissed the RICO claim brought by WLAN product manufacturers against Innovatio IP Ventures, a well known NPE.1 The manufacturers claimed that Innovatio engaged in "a pattern of unlawful racketeering activity" through a scheme to "deceive and defraud" end-users of Wi-Fi internet in an effort to obtain licensing fees.2

Specifically, the complaint alleged that Innovatio violated RICO by sending thousands of licensing demand letters to businesses around the country claiming that their use of Wi-Fi infringed multiple Innovatio patents.3 The recipients of the letters were businesses – including retirement homes, restaurants, and convenience stores – that provided on-premises Wi-Fi-based internet access to their clients and customers using commercial equipment purchased from the plaintiff manufacturers, among others. According to the complaint, Innovatio's letters allegedly demanded "exorbitant licensing amounts" for the patents and "threaten[ed] protracted negotiations with onerous burdens on end users" while offering "supposed 'discounts' for promptly paying Innovatio without engaging in such negotiations."4

The manufacturers further alleged that the letters made clear that Innovatio would "initiate costly litigation with anyone that does not acquiesce," a threat that Innovatio bolstered by filing 23 "sham" lawsuits against targeted business.5 The letters allegedly contained other misrepresentations and omissions, including an omission of the fact that some of the patents had expired or were subject to existing licenses.6

Innovatio moved to dismiss. In considering the RICO claim, Judge James F. Holderman evaluated whether the demand letters and infringement claims constituted "protected petitioning activity under the First Amendment and Noerr-Pennington," which shields from liability parties that petition the government for redress of grievances,7 or whether Innovatio's claims in its demand letters were objectively and subjectively baseless, such that Innovatio lost First Amendment protection under the "sham" exception to Noerr-Pennington. The court held generally that Innovatio's demand letters and infringement claims were protected under Noerr-Pennington because the demands and claims were not "so baseless that no reasonable litigant could realistically expect to secure favorable relief."8

The manufacturers also alleged various misrepresentations in the demand letters, including statements that allegedly exaggerated Innovatio's success in licensing the patents to other similar targets, and also alleged that Innovatio failed to disclose in the demand letters other potential limitations on the validity of Innovatio's demands, such as prior licensing of the patents at issue. These misrepresentations, according to the manufacturers, so undermined the validity of the claims in the demand letters as to make them fall within the sham exception. The court rejected the manufacturers' arguments. The court held that demand letters are an integral part of litigation, and are therefore protected by Noerr-Pennington, and went on to rule that the misrepresentations in Innovatio's demand letters were not "sufficiently central to Innovatio's infringement claims to make its entire licensing campaign a sham."9

Thus concluding that Innovatio's licensing campaign was protected activity, the court dismissed the manufacturers' RICO claim, along with several other claims that would have required the plaintiffs to show that Innovatio's licensing campaign was a sham (e.g., unfair competition and civil conspiracy). The court's decision, however, leaves open the possibility that RICO claims could be pursued against NPEs where the threatened parties can satisfy the factual predicates of the sham exception.

Although the RICO and related claims were dismissed, the case will continue with respect to the manufacturers' breach of contract and promissory estoppel claims, both of which are based on allegations that Innovatio failed to honor RAND commitments made by the prior owner of the patent portfolio during the development of the WLAN 802.11 standard under the auspices of the standard-setting organization IEEE.10 Litigation related to RAND commitments is, of course, on the rise, and as this case progresses, the court will consider what contract rights the manufacturers have – in their own right, or to exercise on behalf of their customers – as a result of the RAND commitments made to IEEE during the standard-setting process.

A copy of the manufacturers' amended complaint is available here. The court's February 4, 2013 order is available here.